Update on the Financing of the Fund's Concessional Assistance and Debt Relief to Low-Income Member Countries
Author: International Monetary Fund
Publication Date:
09 Dec 2007
eISBN:
9781498333344
ISBN:
9781498333344
Language:
English
Keywords:
PP; subsidy account; ESF subsidy contribution; subsidy resource; loan resource; PRGF arrangement; PRGF subsidy requirements; about SDR; interest rate; MDRI debt relief; PRGF loan resource; PRGF borrower; PRGF repayment
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This paper provides a semi-annual review of the status of financing for PRGF-ESF lending, HIPC and MDRI debt relief, and subsidization of emergency assistance to PRGF-eligible members. The last review was completed by the Executive Board on April 13, 2007.

Abstract

This paper provides a semi-annual review of the status of financing for PRGF-ESF lending, HIPC and MDRI debt relief, and subsidization of emergency assistance to PRGF-eligible members. The last review was completed by the Executive Board on April 13, 2007.

I. Introduction

1. This paper provides a semi-annual review of the status of financing for PRGF-ESF lending, HIPC and MDRI debt relief, and subsidization of emergency assistance to PRGF-eligible members.1 The last review was completed by the Executive Board on April 13, 2007.

2. The main points of the paper are:

  • Available loan resources under the PRGF-ESF Trust are projected to be broadly sufficient to meet new loan demand over the next two to three years. The unused loan resources currently stand at SDR 2.7 billion.

  • PRGF subsidy resources are currently projected to fall short of the amount needed by about SDR 0.1 billion, about the same level estimated in the last update.

  • ESF subsidy contributions are less than half of the target for subsidy resources of SDR 500 million (end-2005 NPV terms) initially sought, unchanged from the last update. The pledged contributions from ten countries have remained at about SDR 224 million in cash terms (or SDR 207 million in end-2005 NPV terms).

  • Subsidy resources for emergency assistance are currently estimated to be sufficient to cover existing needs. However, additional contributions on the order of SDR 15-35 million would need to be mobilized to allow the Fund to meet expected future requests for emergency assistance on concessional terms.

  • Additional grant resources are needed for delivery by the Fund of HIPC and MDRI debt relief to the three protracted arrears cases (Liberia, Somalia, and Sudan). In light of Liberia’s strengthened cooperation with the Fund, Fund management has proposed a financing package to mobilize the necessary resources for proceeding with arrears clearance and debt relief for Liberia.

II. Financing of PRGF-ESF Operations

Loan Resources

3. Available loan resources for PRGF-ESF lending stood at SDR 2.7 billion as of end-June 2007, an increase of about SDR 0.2 billion from the last update. During the first half of 2007, the Board approved two new PRGF arrangements (for Burkina Faso and the Gambia), totaling the equivalent of SDR 20 million. In the meantime, the PRGF arrangements with Bangladesh and Honduras expired without full disbursements of the committed amounts. The undrawn balances for both cases totaled SDR 114 million. In addition, on April 11, 2007, the Executive Board approved a request from the Kenyan authorities to reduce the amount of access under the current PRGF arrangement by SDR 75 million. To date, no country has requested assistance under the ESF.

4. Based on current projections, available loan resources would likely be sufficient to cover demand for new PRGF-ESF arrangements over the next two to three years (Table 1). Country-specific projections—excluding the three protracted arrears cases (Liberia, Somalia, and Sudan)2—suggest that demand for PRGF loans through end-2007 could range from SDR 0.2 billion to SDR 0.6 billion, depending on progress toward a new PRGF-supported program by a large quota country. Total demand for new PRGF commitments in 2008 remains uncertain, but could amount to close to SDR 1 billion, assuming that possible requests for PRGF arrangements by several large quota countries will materialize. In addition, in view of recent turmoil in global financial markets and its implications for global liquidity and growth, additional requests for financial assistance from the Fund could be forthcoming.

Table 1.

Loan Resources of the PRGF-ESF Trust

(In billions of SDRs; as of end-June 2007)

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Do not include potential augmentations under existing PRGF arrangements.

Assuming PRGF access equivalent to the exceptional limit of 185 percent of quota under the 11th General Review.

Pledged by France in the context of the ESF.

5. Available loan resources would be exhausted more rapidly, however, should the three countries with protracted arrears to the Fund settle their arrears and request new PRGF arrangements. Under the current PRGF exceptional access limit of 185 percent of quota, PRGF loan resources of about SDR 1 billion would be needed for these cases. While the timing of arrears clearance by the three countries remains difficult to predict, it is important the Fund be in a position to meet the needs of these countries when they are ready to settle their arrears and request new PRGF arrangements.

PRGF Subsidy Resources

6. Available subsidy resources are estimated to amount to SDR 1.2 billion as of end-June 2007 (Table 2). These resources include subsidies currently held in the PRGF-ESF and PRGF-HIPC Trusts, projected additional inflows to both Trusts, and the G-8 additional subsidy contribution of SDR 100 million committed to the PRGF-ESF Trust to maintain the Fund’s concessional lending capacity in the context of the MDRI. While resources in the PRGF-ESF Subsidy Account are available to subsidize both PRGF and ESF loans, for analytical and presentational purposes, the discussion in this section does not include ESF-related subsidy contributions to this account, which are discussed separately below.

Table 2.

PRGF Subsidy Requirements and Availability

(In billions of SDRs; as of end-June 2007)

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Excludes subsidy contributions pledged for the ESF, but includes the G-8 contribution of SDR 100 million in the context of the MDRI.

Excludes the HIPC sub-account balance which is earmarked for HIPC assistance only.

In end-June 2007 NPV terms; mainly reflects interest income on bilateral deposit agreements with the PRGF-HIPC Trust.

7. Staff’s current projections indicate that subsidy resources of about SDR 1.3 billion would be needed to fully subsidize available PRGF loan resources. This would imply a shortfall in subsidy resources of about SDR 0.1 billion in end-June 2007 NPV terms, broadly unchanged from the last update. This estimate does not take into account the pledged contributions to the PRGF-HIPC Trust in the 1999-2000 fund-raising exercise that have not yet been received, amounting to SDR 32 million (Table 3). It is important that these contributions be received as soon as possible to help ensure that PRGF-HIPC operations are fully funded.

Table 3.

Pending Contributions to the PRGF-HIPC Trust

(In millions of SDRs “as needed”; as of end-June 2007) 1/

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The term “as needed” refers to the nominal sum of concessional assistance taking into account the profile of subsidy needs associated with PRGF lending and the provision of HIPC assistance, respectively.

Remaining balances.

ESF Subsidy Contributions

8. Since the establishment of the ESF in 2005, pledged subsidy contributions by ten countries have amounted to SDR 224 million in cash terms, unchanged from the last update (Table 4).3 This remains less than half of the target for subsidy resources initially sought by the Fund.4 While no country has yet requested assistance under the ESF, demand for ESF loans could materialize quickly if the global conditions turn less benign. To this end, it is important that additional subsidy contributions be forthcoming to fulfill the initial target and allow the Fund to provide such assistance to eligible countries in a timely manner.

Table 4.

ESF Subsidy Contributions

(In millions of currency units; as of end-June 2007)

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Calculated using the exchange rate of end-June 2007.

In end-2005 NPV terms.

Tentative estimate; subject to finalization of commitment.

Reflecting net investment income (in end-2005 NPV terms) to be generated from investment/deposit agreements.

PRGF-ESF Trust Reserve Account

9. The Reserve Account provides security to PRGF-ESF Trust lenders in the event of a delay or non-repayment by PRGF-ESF borrowers. The Account has been financed by reflows of Structural Adjustment Facility (SAF) and Trust Fund repayments and investment returns on the balance held in the Account. The balances in the Reserve Account amounted to SDR 3.4 billion as of end-June 2007, representing a substantial multiple of projected PRGF repayments falling due in the coming 12 months (Table 5).5

Table 5.

PRGF-ESF Trust—Reserve Account Coverage 1/

(In millions of SDRs)

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Excludes associated loans of SDR 49.5 million from the Saudi Fund for Development (SFD), the risk of which is borne by the SFD, overdue Trust Fund obligations (SDR 119 million), and overdue SAF obligations (SDR 10 million).

The sharp drop from 2005 reflects early repayments arising from the delivery of HIPC and MDRI debt relief which reduced total PRGF credit outstanding by about 40 percent.

10. The Executive Board earlier considered the modalities of the Fund’s concessional operations involving the use of the Reserve Account of the PRGF-ESF Trust over the medium term.6 Most Directors were of the view that staffs proposed approach of maintaining the current framework for future PRGF financing would seem appropriate and should be pursued. Under this approach, it is envisaged that, beyond the interim PRGF period, resources needed for financing loan principal would continue to be provided by bilateral creditors as under the current PRGF-ESF Trust, while subsidy resources would be made available from the Reserve Account.7 Staffs estimates suggest that available Reserve Account resources could subsidize annual lending of about SDR 0.7 billion in perpetuity, starting in 2009,8 on the assumption that the Fund will not seek reimbursement of the GRA for the cost of administrating the PRGF-ESF Trust.9 The resumption of such reimbursement will reduce the Reserve Account’s capacity to subsidize concessional lending. For instance, a reimbursement of SDR 50 million per annum (similar to levels of expenses observed in recent years) would lower the Reserve Account’s annual subsidized lending capacity from SDR 0.7 billion to about SDR 0.5 billion in perpetuity.

11. In the discussion of developing a new income model for the Fund, the Board considered whether to resume reimbursement of the GRA for the administrative expenses of the PRGF-ESF Trust. Most Directors supported the resumption of such reimbursement, but also considered it crucial that alternative sources of funding be found in the event that the capacity of the PRGF-ESF Trust for subsidized lending proves insufficient following the resumption of reimbursement. These Directors also endorsed further analysis of broadening the investment mandate of the PRGF-ESF Trust as a means to cushion the impact on lending capacity from resuming reimbursement. A number of Directors were not in favor of resuming reimbursement, noting—among other factors—the public good function of PRGF-related lending, the uncertainty of donor support, and the importance of maintaining the crucial role of the Fund in low-income countries.

III. Financing of HIPC and MDRI Debt Relief

12. The Fund has so far committed HIPC Initiative debt relief to 31 countries that have reached decision point, amounting to SDR 1.9 billion (Table 6). Of these countries, 22 have reached completion point and received HIPC debt relief of SDR 1.7 billion. In addition, seven of the nine countries that have reached decision point (but not yet completion point) have benefited from HIPC interim assistance totaling SDR 18 million. Since the last update, Afghanistan has reached decision point, and no additional country has reached completion point.10

Table 6.

Implementation of the HIPC Initiative

(In millions of SDRs)

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Includes interest on amounts committed under the enhanced HIPC Initiative.

Includes commitment under the original HIPC Initiative.

The committed topping-up assistance will be disbursed upon receipt of satisfactory financing assurances.

Cote d’Ivoire reached the decision point under the original HIPC Initiative in March 1998, but did not reach the completion point, nor has it reached the decision point under the enhanced HIPC Initiative.

Including SDR 17 million committed to Cote d’Ivoire under the original HIPC Initiative.

13. The cost to the Fund of providing MDRI debt relief is estimated at about SDR 2.6 billion, broadly in line with the previous estimates.11 These estimates exclude the newly identified ring-fenced HIPCs12 and the three protracted arrears cases. Under this framework, qualifying members would receive 100 percent debt relief on the full stock of debt owed to the Fund at end-December 2004 that remains outstanding at the time the member qualifies for such debt relief and is not covered by HIPC Initiative assistance. The estimated cost would be covered by the resources in the MDRI-I and II Trusts of SDR 1.5 billion and SDR 1.12 billion, respectively. The Fund has so far delivered MDRI debt relief to 24 countries in an amount of SDR 2.3 billion (Table 7).13 Since the last update, no additional country has qualified for or received MDRI debt relief.

Table 7.

Debt Relief Following Implementation of the MDRI

(In millions of SDRs)

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Balances outstanding at the time of MDRI debt relief.

Non-HIPCs but qualified for MDRI debt relief with a per capita income below the US$380 threshold.

Decision and Pre-Decision Point HIPCs14

14. The cost of providing HIPC-MDRI debt relief to the 16 decision and pre-decision point HIPCs is estimated at SDR 0.7 billion. Of this amount, the cost for the nine countries that have already reached the HIPC Initiative decision point would amount to SDR 0.6 billion, while the cost for the seven cases that have not yet reached decision point would be about SDR 0.1 billion. For presentational and analytical purposes, these costs do not include those associated with the three protracted arrears cases, which are discussed in a separate section below.

15. Among the above countries, the cost of HIPC-MDRI debt relief to the five ring-fenced HIPCs would amount to SDR 12 million, as compared to SDR 80 million estimated in the last update. The reduction in the estimated cost reflects two developments. First, the Kyrgyz Republic is now excluded from the cost estimates, as the authorities indicated in early 2007 that they did not wish to avail themselves of debt relief under the HIPC Initiative. Second, the estimated cost of debt relief for Nepal was reduced, reflecting changes in the outlook for this country.

16. Available resources appear sufficient to finance debt relief to the above HIPCs (Table 8).15 However, it should be noted that the cost of providing debt relief to the newly identified ring-fenced HIPCs was not included in the original HIPC-MDRI financing framework. While resources in the HIPC and MDRI Trusts are available to qualifying members on a “first-come, first-served” basis and are likely sufficient to cover the financing needs of these cases, additional financing would need to be mobilized should the estimated cost for these countries turn out to be larger.16

Table 8.

Financing of Debt Relief to the Remaining HIPCs 1/

(In billions of SDRs; end-June 2007 NPV terms)

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Excluding Liberia, Somalia, and Sudan.

Including resources in the HIPC Umbrella account.

Protracted Arrears Cases

17. Providing debt relief to the three protracted arrears cases—Liberia, Somalia, and Sudan—would require substantial additional resources. As of end-June 2007, the total arrears of these countries to the Fund amounted to SDR 1.8 billion. As the costs for providing debt relief to these countries were not included in the financing framework of the HIPC Initiative and the MDRI, additional financing will need to be identified and secured.

18. In light of Liberia’s strengthened cooperation with the Fund, Fund management has proposed a financing package to mobilize the needed resources for financing debt relief to Liberia. It is important that sufficient resources be forthcoming to secure the package so as to allow the Fund to proceed with arrears clearance and debt relief for Liberia expeditiously.

IV. Subsidization of Emergency Assistance

19. The Executive Board, in January 2005, decided to extend the subsidization of emergency post-conflict assistance (EPCA) to emergency assistance for natural disasters (ENDA) for PRGF-eligible member countries, subject to resource availability. It was estimated that subsidy resources of about SDR 45-65 million would need to be mobilized for 2005-09. Since then, firm pledges of about SDR 30 million have been committed by 17 countries, with the remaining SDR 15-35 million yet to be mobilized.

20. Subsidy resources for both ENDA and EPCA are estimated to amount to about SDR 27.5 million (Table 9), including the balances available in the three sub-accounts and forthcoming disbursements of existing pledges. Of this amount, SDR 6.5 million is available for subsidization of EPCA only, SDR 8 million for subsidization of ENDA only, and about SDR 12.9 million for subsidization of both types of assistance.

Table 9.

Subsidization of Emergency Assistance for the Existing Cases

(In millions of SDRs; end-June 2007 NPV terms)

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Including forthcoming disbursements of SDR 7.6 million.

21. Total resources needed for subsidization of outstanding emergency assistance are estimated at SDR 19 million in end-June 2007 NPV terms (Table 10). Currently available subsidy resources are, therefore, likely sufficient to cover the estimated needs of the existing cases. Subsidy resources available for new requests would amount to SDR 8.6 million, adequate to support subsidization of new ENDA/EPCA credit of about SDR 45 million.

Table 10.

ENDA/EPCA Credit Outstanding and Subsidy Needs 1/

(In millions of SDRs)

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Excluding credit outstanding that is not subject to subsidization and future cases.

22. Looking ahead, new requests for EPCA are anticipated in the coming months, including a possible second purchase by Cote d’Ivoire, which will require mobilization of additional subsidy resources. Based on the current interest rate assumptions, the projected subsidy needs of the forthcoming requests will likely exceed the available resources. As subsidy resources, if not sufficient, are available to PRGF-eligible countries on a pro-rata basis,17 in the absence of additional resources, there is no assurance that current and prospective users of emergency assistance will receive full subsidization of their entire ENDA and/or EPCA purchases. In this context, the original target for subsidy contributions of SDR 45-65 million set in early 2005 remains appropriate. It is, therefore, a matter of urgency to mobilize the remaining amount of SDR 15-35 million to enable the Fund to meet new requests for subsidization of emergency assistance in a timely manner.

V. Proposed Decision

The following decision, which may be adopted by a majority of the votes cast, is proposed for adoption by the Executive Board:

The Executive Board notes the report entitled “Update on the Financing of the Fund’s Concessional Assistance and Debt Relief to Low-Income Member Countries”, and decides that (i) the semi-annual reviews of the financing of the MDRI-I and MDRI-II Trusts, contemplated in paragraphs 1 and 2, respectively, of Decision No.13588-(05/99) MDRI, adopted November 23, 2005, effective January 5, 2006, and (ii) the semi-annual review of the financing of the Trust for Special PRGF Operations for the Heavily Indebted Poor Countries and Interim PRGF Subsidy Operations, contemplated in paragraph 2 of Decision No. 11436-(97/10) adopted February 4, 1997, as amended, are completed.

Table 11.

Subsidy Contributions for Emergency Assistance

(In millions; as of end-June 2007)

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For contributions which have been fully received, the SDR equivalent is the actual SDR amount received using the exchange rate on the value date. For contributions that are not yet disbursed, the SDR equivalent is calculated using the exchange rate at end-June 2007.

Reflecting investment income to be generated on a deposit agreement, effective May 2006.

To subsidize the rate of charge on purchases by Sri Lanka and Maldives under ENDA following the 2004 tsunami.

Initial contribution, previously earmarked for EPCA.

Table 12.

Summary of Bilateral Contributions to the PRGF-ESF and PRGF-HIPC Trusts

(In millions of SDRs; as of end-June 2007)

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Less than SDR 5,000.

Subsidy contributions of Bangladesh, Belgium, Czech Republic, India, Luxembourg, Netherlands, Saudi Arabia, Sweden, and Thailand are held in the PRGF Subsidy Account. Tunisia’s contribution is held in both PRGF Subsidy Account and ESF Subsidy Account. All other countries’ contributions are held in the PRGF-ESF Subsidy Account.

Excludes the G-8 commitment of SDR 100 million in end-2005 NPV terms and new ESF subsidy contributions.

Estimated values of total contributions include forthcoming contributions that are not yet received. The term “as needed” refers to the nominal sum of concessional assistance taking into account the profile of subsidy needs associated with PRGF lending and the provision of HIPC assistance, respectively.

Table 13.

PRGF-ESF Trust—Subsidy Agreements 1/

(In millions of SDRs; as of end-June 2007)

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Subsidy contributions to the PRGF-ESF Trust result from the difference between the investment income on contributions and the below market rate of interest paid to contributors.

In January 2006, the original PRGF Subsidy Account was renamed as the PRGF-ESF Subsidy Account, and two new subsidy accounts, the ESF Subsidy Account and the PRGF Subsidy Account, were established. For deposits/investments that have not yet expired, the current name of the account is presented. For deposits/investments that have been repaid, the old name of Subsidy Account is kept.

Equivalent of US$10 million (at the exchange rate of June 29, 1994).

The Fund made early repayments to Botswana, Malaysia, and Singapore on March 1, 2004.

Interest rate paid is equivalent to the return on investment by the Fund on this deposit (net of any costs), less 2.0 percent per annum. If the

interest rate obtained is less than 2.0 per annum, the deposit shall bear zero interest.

All the deposits will be repaid together at the end of sixteen years after the date of the first deposit.

Including (i) a new investment of SDR 38.2 million; and (ii) a rollover of two investments of SDR 49.8 million and SDR 27.9 million and of the deposit of SDR 16.7 million from the PRGF-HIPC Trust upon their maturities in 2011, 2011-14, and 2018, respectively.

The investment coincides with the repayment of each of the first nine (out of ten) semiannual installments of a drawing of the PRGF-ESF Trust loan of SDR 67 million from the Government of Spain (the Instituto de Crédito Oficial).

Equivalent of US$5 million (at the exchange rate of May 11, 1994).

Interest rate paid is equivalent to the return on this investment by the Fund (net of any costs), less 2.6 percent per annum. If the interest rate obtained by the Fund is 2.6 percent per annum or less, the investment shall bear zero interest.

Table 14.

PRGF-ESF Trust—Loan Agreements

(In millions of SDRs; as of end-June 2007)

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Including additional loan commitments for interim PRGF operations.

Before April 17, 1998, known as Caisse Fran9aise de Développement.

In late 1999, the Bank of Italy replaced the Ufficio Italiano dei Cambi as lender to the PRGF Trust.

On October 1, 1999, the Export-Import Bank of Japan merged with the Overseas Economic Cooperation Fund and became the Japan Bank for International Cooperation.

The loan commitment is for the SDR equivalent of US$50 million.

The original loan commitment of the Bank of Spain was SDR 220 million; however, only SDR 216.4 million was drawn and disbursed by the expiration date for drawings.

The full loan commitment of SDR 200 million was drawn in January 1989; this amount was fully disbursed to borrowers by March 1994.

On August 26, 1998, the SFD indicated that it did not intend to make further loans in association with the PRGF.

Any mismatch of outstanding resources between the amount owed by PRGF borrowers and the amount owed to PRGF lenders arises because of mismatches in timing between drawdowns from lenders to the Trust and disbursements of PRGF loans to borrowers.